H2 Prelims Paper 2 Q2_Suggested Answers

2. Evidence has shown that the workers’ participation rate for skills upgrading workshops is generally low, mainly due to ‘short-sightedness’ by both firms and employees. Firms are worried that trained workers quit to join the competitors. Training subsidies provided are also unevenly distributed to different industries. (a) Explain how the market for skills training may fail. [10] (b) Discuss the view that government intervention in the skills training market may create more problems than it solves. [15] Suggested Responses (a) Explain how the market for skills training may fail. [10] Question analysis Command Word “Explain” – requires student to explain how the market for skills training allocate resources inefficiently – positive externalities and imperfect information Context Skills Training Concept Market failure – positive externalities, imperfect information Introduction: Consumers behaviour in the demand for skills training, is influenced by their objective of maximising self-interests (satisfaction). With upgrading of skills, there are possibilities of earning higher income, better promotion prospects in their career. From the perspective of employers, they are influenced by their objective of maximising their profits. When employees skills increase, there are possibilities of a higher productivity and higher profits. Body paragraph/Requirement 1: The market for skills training may fail due to positive externalities Explaining the market equilibrium (maximising self-interest): In maximising their satisfaction, consumers only consider their marginal private costs (MPC) and marginal private benefits (MPB). In this case, • MPC = payment for skills training courses and opportunity costs incurred e.g. loss of income during the period of skills training.

• MPB = higher income that could be earned upon completion of these skills training programmes Thus, consumers, based on their own benefits and costs, will decide to consume at the market equilibrium level QM, where they equate their MPC to MPB, at the equilibrium price Pm. They totally ignore the benefits to the third party. Explaining the benefits to third parties (divergence between MSB and MPB): The full extent of benefits include benefits to individuals and third parties i.e. firms and economy. Benefits to third parties are termed external benefits. Some examples include: • Firms benefit from the rise in labour productivity as workers complete their skills training to undertake improved production techniques. These firms, with a more skilful workers, could adopt technology / automation in their production processes, enabling firms to become more efficient and earn higher profit margin. • (In addition, Countries with higher productive labour force would also attract overseas investment which would lead to job creation leading to higher economic growth in the country) • The full extent